Future history books, depending on where they are written, will take one of two approaches when they assign blame for the world’s current financial and economic crisis.
One approach will blame lax regulation, accommodating monetary policy and inadequate savings in the US. The other, already being pushed by economists like former chairman of the US Federal Reserve Alan Greenspan and incumbent Chairman Ben Bernanke, will blame the immense pool of liquidity generated by high-savings countries in East Asia and the Middle East.
All that liquidity, they will argue, had to go somewhere. Its logical destination was the country with the deepest financial markets, the US, where it raised asset prices to unsustainable heights.
Note the one thing on which members of both camps agree: The global savings imbalance — low savings in the US and high savings in China and other emerging markets — played a key role in the crisis by allowing Americans to live beyond their means. It encouraged financiers desperate to earn a return on abundant funds to put them to more speculative use. If there is a consensus on one issue, it is the impossibility of understanding the bubble and the crash without considering the role of global imbalances.
Preventing future crises similar to this one therefore requires resolving the problem of global imbalances. Here, the early signs are reassuring. US households are saving again.
The most recent data show US trade deficit has declined from US$60 billion a month to just US$26 billion. As a matter of simple arithmetic, we know that the rest of the world is running correspondingly smaller surpluses.
But once US households rebuild their retirement accounts, they may return to their profligate ways. Indeed, the Obama administration and the Federal Reserve are doing all they can to pump up US spending. The only reason the US trade deficit is falling is that the country remains in a severe recession, causing US imports and exports to collapse in parallel.
With recovery, both may recover to previous levels, and the 6 percent-of-GDP US external deficit will be back. In fact, there has been no change in relative prices or depreciation of the US dollar of a magnitude that would augur a permanent shift in trade and spending patterns.
Whether there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China. One’s forecast of those decisions hinges, in turn, on why these other countries came to run such large surpluses in the first place.
One view is that their surpluses were a corollary of the policies favoring export-led growth that worked so well for so long. China’s leaders are understandably reluctant to abandon a tried-and-true model.
They can’t restructure their economy instantaneously. They can’t move workers from painting children’s toys in Guangdong Province to building schools in western China overnight.
They need time to build a social safety net capable of encouraging Chinese households to reduce their precautionary saving. If this view is correct, we can expect to see global imbalances re-emerge once the recession is over and to unwind only slowly thereafter.
The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports. What China lacked was not demand for consumption goods, but a supply of high-quality financial assets. It found these in the US, mainly in the form Treasury and other government-backed securities, in turn pushing other investors into more speculative investments.
Recent events have not enhanced the stature of the US as a supplier of high-quality assets. And China, for its part, will continue to develop its financial markets and its capacity to generate high-quality financial assets internally. But doing so will take time. Meanwhile, the US still has the most liquid financial markets in the world. This interpretation again implies the re-emergence of global imbalances once the recession ends and their very gradual unwinding thereafter.
One development that could change this forecast is if China comes to view investing in US financial assets as a money-losing proposition. US budget deficits as far as the eye can see might excite fear of losses on US Treasury bonds.
A de facto policy of inflating away the debt might stoke such fears further. At that point, China would pull the plug, the dollar would crash, and the Fed would be forced to raise interest rates, plunging the US back into recession.
There are two hopes for avoiding this disastrous outcome. One is relying on Chinese goodwill to stabilize the US and world economies.
The other is for the Obama administration and the Fed to provide details about how they will eliminate the budget deficit and avoid inflation once the recession ends.
The second option is clearly preferable. After all, it is always better to control one’s own fate.
Barry Eichengreen is professor of economics at the University of California, Berkeley.
COPYRIGHT: PROJECT SYNDICATE
With escalating US-China competition and mutual distrust, the trend of supply chain “friend shoring” in the wake of the COVID-19 pandemic and the fragmentation of the world into rival geopolitical blocs, many analysts and policymakers worry the world is retreating into a new cold war — a world of trade bifurcation, protectionism and deglobalization. The world is in a new cold war, said Robin Niblett, former director of the London-based think tank Chatham House. Niblett said he sees the US and China slowly reaching a modus vivendi, but it might take time. The two great powers appear to be “reversing carefully
As China steps up a campaign to diplomatically isolate and squeeze Taiwan, it has become more imperative than ever that Taipei play a greater role internationally with the support of the democratic world. To help safeguard its autonomous status, Taiwan needs to go beyond bolstering its defenses with weapons like anti-ship and anti-aircraft missiles. With the help of its international backers, it must also expand its diplomatic footprint globally. But are Taiwan’s foreign friends willing to translate their rhetoric into action by helping Taipei carve out more international space for itself? Beating back China’s effort to turn Taiwan into an international pariah
Taiwan is facing multiple economic challenges due to internal and external pressures. Internal challenges include energy transition, upgrading industries, a declining birthrate and an aging population. External challenges are technology competition between the US and China, international supply chain restructuring and global economic uncertainty. All of these issues complicate Taiwan’s economic situation. Taiwan’s reliance on fossil fuel imports not only threatens the stability of energy supply, but also goes against the global trend of carbon reduction. The government should continue to promote renewable energy sources such as wind and solar power, as well as energy storage technology, to diversify energy supply. It
Typhoon Krathon made landfall in southwestern Taiwan last week, bringing strong winds, heavy rain and flooding, cutting power to more than 170,000 homes and water supply to more than 400,000 homes, and leading to more than 600 injuries and four deaths. Due to the typhoon, schools and offices across the nation were ordered to close for two to four days, stirring up familiar controversies over whether local governments’ decisions to call typhoon days were appropriate. The typhoon’s center made landfall in Kaohsiung’s Siaogang District (小港) at noon on Thursday, but it weakened into a tropical depression early on Friday, and its structure